The Market for Privacy: Understanding How Consumers Trade Off Privacy Practices

Abstract

In recent years, firms’ privacy practices have received increasing attention from consumers. While firms largely see this development as a threat, as consumers might prohibit collection or use of data, we suggest that it can also represent an opportunity for firms. On the “market for privacy,” firms can gain a competitive advantage by differentiating and actively promoting preferred privacy practices. In this context, the authors study how consumers trade off five privacy elements, three relating to distributive fairness (i.e., information collection, storage, use) and two relating to procedural fairness (i.e., transparency, control). Moreover, they analyze how the impact of these elements differs among four industries that vary in information sensitivity and interaction intensity. By using discrete choice experiments, the authors show that all privacy elements matter to consumers, even when in a trade-off with price. In highly sensitive industries, differences in information collection and use matter more, while storage matters less, for differentiation. When consumers have less frequent interactions with companies, they require more transparency about their privacy practices. The authors demonstrate empirically that optimizing privacy practices can lead to robust changes in market shares (Study 1) and higher revenues in equilibrium (Study 2) when firms embrace the market for privacy.